Despite universities abroad levying differential (higher) tuition fees on foreign students, the annual flow of scholars from India heading abroad for higher education shows no sign of abating. In 2018-19, a record 368,000 Indian school and college-leavers from India enrolled in higher education institutions in Canada and the US.
But study abroad is often difficult — if not impossible — without availing education loans. Fortunately, capital abroad is cheap and the free markets system ensures there’s no shortage of student loan providers. But with a wide array of loan options available to students enrolled in higher education institutions in Canada and the US, choosing the most suitable option is difficult. Here’s a guideline.
Interest rate or APR? Some lenders charge fees that are incorporated into interest rates. This is why many countries mandate the disclosure of APR (annual percentage rate), which is a broad measure of the cost of finance. APR includes the interest rate plus loan processing costs. That’s why APR is generally recommended for student loan applicants. However, it’s important to note that some lenders insert charges that escape the conventional APR calculation, such as prepayment fees and compulsory purchase of life insurance. Therefore, reading the fine script of APR agreements is advisable.
Guarantees. Many lenders insist on collateral, cosigners/guarantors, co-applicants, co-borrowers and similar security. While such guarantees may reduce the interest rate payable, you may be imposing a financial burden on nears and dears. Therefore, weigh how comfortable you are with this. It may be worthwhile to pay a slightly higher interest rate for financial independence.
Fixed or floating? It is also important to consider whether the interest rate offered is fixed or floating. Lenders often offer floating/variable interest rate loans, which means the interest rate will rise or fall based on LIBOR (London Inter Bank Offered Rate). This means borrowers bear the risk of interest rates payments rising (or falling) over the life of the loan. Budget conscious students therefore prefer fixed-rate loans which means the interest rate on the loan is constant until the principal is repaid.
Currency. Interest rates apart, students should also choose the currency in which the loan is to be repaid. Some students prefer rupee-denominated loans because they believe the rupee will appreciate in the long-term which means they will need fewer dollars to repay the loan. However, rupee appreciation is not assured — and even if assured — it may hurt the student. For example, a student who takes a rupee-denominated loan may find that due to rupee depreciation, the loan amount may become insufficient to cover tuition and other fees in dollars. Students who intend to work abroad after graduation usually prefer the stability and predictability of payments towards a loan. Therefore, they prefer to transact in a stable currency.
Lender’s home-base. For the same reason, it matters where your lender is based. Foreign immigration authorities generally require students to prove they have sufficient funds to complete their education. Therefore, a sanctioned loan or visa support letter from an American lender may be more respected for students in higher education in the US or Canada. Lenders based in North America may also have strong relationships with American universities, and be able to cover a wider variety of schools, expenses and fields of study.
Establishing a credit profile. For students who opt to work abroad after graduation, lenders can help them build a credit profile. This is essential for successful positioning after graduation, because a credit profile is necessary to acquire credit cards, lease an apartment or even land a job interview. Therefore, students who intend to reside overseas after completing their education should establish a credit profile and history during their university years and position themselves for success after graduation. Lenders can help students build a credit profile, provided they are based in the country of education.
Additional student support. Lenders often offer students a wide variety of support such as scholarships, career readiness preparation, flexible payment options and loan repayment forbearance. While most students don’t anticipate needing career support after graduation, they can use these support services to derive comfort that the lender has the student’s interests at heart, and will support her through good times and bad.
The rising number of students heading to foreign shores for higher study is proof that foreign higher education can be a personal and professional life changer. Not only do foreign universities offer greater intellectual challenge and opportunity, they also transform students into global professionals comfortable with working in cross-cultural professional and social environments. To fund this transformation, students should carefully choose loan providers with the resources, capabilities and knowledge to help them succeed — at home or abroad.
(Sasha Ramani is head of corporate strategy at the Washington D.C-based Mpowerfinancing.com)